Foreign inflows have pushed the market up by 25%. However, there is no evidence of investment picking up any time soon, according to the latest Espirito Santo Securities report

Foreign institutional investors have been betting their money on Indian equities, pushing up BSE benchmark Sensex by about 25% for CY2012, on the back of a slew of economic reforms initiated by government. The reform measures by the Indian government have been rewarded by foreign portfolio flows of $20.51 billion this year. “A 25% jump in the Sensex clearly needs more than stabilization at anaemic levels for the rally to be sustained and built on. Given an increasingly stretched consumer and a government under fiscal pressure, all bets are on a turn in the investment cycle”, says the latest report from Espirito Santo Securities.
 

This has been the second highest net inflow by foreign institutional investors (FIIs) in a single calendar year. In 2010, overseas investors had made net investments of about $29 billion. FIIs, a major participant in the Indian stock market, had pulled out $ 358 million in 2011. In the last five months (July 2012-November 2012) FIIs have put in $11 billion whereas domestic institutional investors have withdrawn $5 billion. But has the incessant buying by FIIs led to equities being overbought?
 

Whether the current momentum can be sustained is dependent on whether there will be rate cuts in January, and that the recent policy frenzy and focus on PMO project clearances will mean fresh investment and announcements of new projects. However, the research firm, Espirito Santo Securities, does not expect the investment turning anytime soon. “The fall in new project announcements have picked up pace again, and there is weakness across sectors, in particular power which has seen a rise in shelved and stalled projects. Falling interest rates clearly help, but more concrete measures from government are also needed,” they mention in the report. Also, implementing the National Investment Board (NIB) is important, as it should speed up stalled projects above Rs10 billion in roads, mining, power, petroleum, natural gas, ports and railways, through improving inter-ministerial coordination and some centralization of project approvals, the report mentions.
 

As far as GDP growth is concerned the research firm does not have high expectations. “While broad indicators suggest stabilization at current low levels, we do not expect a sharp rebound in GDP. We keep our GDP forecast at 5.6% y-o-y (year on year) in FY2013 and expect the RBI (Reserve Bank of India) to cut the Repo rate in January 2013,” says the report. Inflation for the month of October eased slightly to 7.45%, much lower than consensus estimates, core WPI inflation decelerated to 5.2% in October from 5.6% in September. Food inflation declined to an eight-month low at 7.7%. On the back of easing inflation and sluggish growth, the firm expects that RBI would cut rates by 50-75 basis points in 4QFY13E.
 

Leading brokerage firm Goldman Sachs sees growth picking up gradually to 6.5% in 2013 and further to 7.2% in 2014. On the other hand, Credit Suisse holds a negative stance cutting its FY13 growth estimate to 5.9% from 6% citing the delay by the RBI in cutting rates to support growth.
 

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